American University of Paris

October 27, 2009

Artificial Inflation and Tire Tariffs

By Jim Cheng

On Friday, September 11th 2009, President Obama imposed a three year tariff on Chinese tire imports in response to a trade complaint filed by the United Steelworkers Union. The tax will amount to 35% the first year, 30% the second year, and 25% the third year, which is quite a bit lower than the 55, 45, and 35 numbers recommended by the International Trade Commission. Even still, it has drawn immediate ire from economists and political pundits alike.

Economically speaking, barriers to trade (such as tariffs) can never benefit society. In the case of any tariff, domestic prices are artificially inflated. This new tire tariff has already caused American tire wholesalers to warn of impending price hikes of up to 28%. Higher prices in turn cause much more harm to domestic consumers than whatever gains domestic producers can reap, simply because there are many more consumers than producers in the market. Rutgers economist Thomas J. Prusa, estimated that the 35% tariff will cost the economy about 20,000 jobs in the tire distribution and retail sector while "saving" only 1,000 jobs at the domestic manufacturing plants it aims to protect.

The Obama Administration has tried to downplay its action as a domestic policy move. White House advisers claim that the tariff amounts to an inconsequential fraction of the trillions of dollars of value exchanged between the two nations every year. Indeed, Obama could simply be trying to assuage the powerful labor unions that make up an integral part of his coalition by appearing to save jobs while putting up a bolder front towards China. But he is sending a conflicting message to the rest of the world.

Just this April, Obama was still encouraging leaders at the G20 in London to resist protectionism. He preached a similar sermon at the G8 in July. Indeed, the United States has a long history as the global champion of free trade. Since FDR took over in the 1930s, each and every American President from either party has moved towards reducing tariffs and lowering other barriers to trade. Yet the president’s most recent maneuver could very easily threaten over eight decades of progress. Already, China has threatened to retaliate against American auto parts and chicken. If a tit-for-tat exchange results, what’s to stop other nations from joining in and escalating the situation into a full-blown trade war?

A month has passed since Obama issued the tariff and no significant actions have been taken besides a Chinese complaint to the World Trade Organization. Even still, we should tread carefully. Protectionism unequivocally damages the world’s net welfare. It is especially dangerous in today’s economic environment, in which a few reckless trade barriers could very well throw the whole world back into a recession.